How do you figure out the value of a stock with a $2.50 dividend just paid and an 8% required return with 0% growth
To figure out the value of a stock with a $2.50 dividend just paid and an 8% required return with 0% growth, we can use the dividend discount model (DDM).
The DDM is a method used to value stocks by estimating their intrinsic value based on expected future dividends. However, in the given scenario where there is zero growth, the formula simplifies to the dividend divided by the required return rate.
Here are the steps to calculate the value of the stock:
1. Determine the dividend: In this case, the dividend is given as $2.50.
2. Identify the required return: The required return is the minimum rate of return an investor expects to earn on their investment. In this scenario, it is 8%.
3. Use the formula: Divide the dividend by the required return rate to get the stock value.
Stock Value = Dividend / Required Return Rate
Stock Value = $2.50 / 0.08
Stock Value = $31.25
Therefore, the value of the stock in this scenario is $31.25.